Relative Strength Index (RSI) is one of the important indicators used in technical analysis. RSI is a momentum oscillator that can be used in stock trading, futures trading, forex trading and commodity trading. RSI indicator was developed by J Welles Wilder for the commodities market in the late 1970s. But over the years, it has been found to work very well for the forex as well as the stocks market.
RSI is usually used on the 14 day timeframe and it measures the velocity and magnitude of the directional price movements as a ratio of the higher closes to the lower closes. We don't need to go into the details of how the RSI indicator values are calculated as you will only need to read the RSI indicator graph values below the price action on the chart. It is called an oscillator as its values oscillate between the two values of 0 and 100.
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Overbought and Oversold Indicator
RSI is also known as the Overbought and Oversold Indicator. RSI is plotted on an Index 0-100. 50 is the median line. Values above 70 are considered overbought and values below 30 from oversold. However, you must buy this oversold condition and confirm with other indicators!
Divergence with RSI trading
The deviations are significant signs of reversal when combined with other indicators give a high probability trade configurations. CSR is widely used for the identification of patterns of divergence used. A variation on the model developedChart when the price action moves in one direction and moves to another screen.
For example, the price action is moving with the ascending slope, as it moves across the RSI is down the slope. This model is known as positive or bullish divergence pattern pattern divergence. It shows a possible change in trend from top to bottom. Even if the price action is tilted downward, while the RSI is tilted up, it means that on the downwarddivergence pattern.
Over the years, this RSI indicator has been widely used by the traders to trade forex, stocks and commodities and it has withheld the test of time. It was introduced in 1978 as said above by Wilder but it still works. That is because this indicator was developed by Wilder using sound theoretical principles that were universal in nature. RSI is extensively used in divergence trading and produces good buy/sell signals!
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